Reinsurance in Kazakhstan

Reinsurance is currently a highly relevant topic both for players in the domestic insurance market and for our foreign partners. In recent years, owing to legislative initiatives of the Kazakhstan regulator, reinsurance has undergone serious changes in terms of prudential regulation. This article discusses how the Kazakhstan reinsurance market has developed over the past 7 years and how the changes will affect the further development of the reinsurance market.

The number of insurance market participants has remained virtually unchanged over the past 7 years. As of 1 January 2012, 38 insurance organizations carry out licensed activities in the insurance market of Kazakhstan, including 31 general insurance companies and 7 life insurance companies, as well as 14 insurance brokers and 85 actuaries. It should be noted that the number of licensed actuaries has been growing in recent years: compared with 2005, it has almost tripled.

The dynamics of insurance premiums (KZT 176 billion in 2011 versus 67 billion in 2005, a 2.63-fold increase) and insurance payouts (KZT 11 billion in 2005 and KZT 43 billion in 2011) testify to the quantitative and qualitative growth of the market.

Over the past two years, following the decline in volumes during the financial crisis, the insurance market has seen growth in insurance premium collections, which is primarily due to the revival of retail lending by the banking sector and increased business activity in the corporate sector.

It should be noted that the impact of the financial and economic crisis on the insurance market proved insignificant. Insurance organizations maintain a high level of profitability thanks to low loss ratios, and the growth of insurers' equity capital indicates a significant increase in the capacity of the Kazakhstan insurance market.

Reinsurance premiums grew from KZT 27 billion in 2005 (40.30% of insurance premiums) to KZT 65 billion in 2011 (36.93% of insurance premiums). As for reinsurance recoveries, the main trend unfortunately remains the very low level of indemnification from non-resident reinsurers. In 2011, over KZT 64 billion was ceded to reinsurance, while reinsurance recoveries amounted to about KZT 8 billion (about 13%). In addition, a significant share of reinsurance premiums is ceded abroad. Over 2005–2010, the share of premiums ceded to non-residents in the structure of ceded premiums remained virtually unchanged. Only in 2011 was there a relative decrease in premiums ceded to non-residents, from 89% (2010) to 78% in 2011. Reinsurance premiums accepted from non-residents show growth, peaking in 2009, when over KZT 11 billion was accepted for reinsurance.

Foreign risks are placed on the Kazakhstan market mainly both directly by cedents and with the participation of local and foreign insurance (reinsurance) brokers.

Over the past two years, premium inflows from abroad have declined significantly. Previously, the local market was typically offered property, aviation and space risks and various types of liability for reinsurance, and the priorities of obligatory treaties placed in the West, or exclusions from coverage under obligatory programmes, were placed on a proportional basis.

Recently, local insurance companies have become more cautious and selective in accepting foreign risks, given the high loss ratios on these projects. The geographical structure of reinsurance has also changed. In 2011, there was a redistribution among countries: Kazakhstan ranked first (22%) (in 2010, Russia), the Russian Federation second with 20% (in 2010, the United Kingdom with 22%), followed by the United Kingdom with 14% (in 2010, Kazakhstan with 11%), and so on.

Kazakhstan content increased from 11% in 2010 to 22% in 2011. This change was due to amendments to legislative acts. The adoption of new legislative measures gave fresh impetus to the further development of the insurance market.

Under the adopted regulatory legal acts, the minimum solvency margin or guarantee fund of an insurance organization is now increased by the amount of liabilities for ceded reinsurance premiums under effective reinsurance contracts, depending on the reinsurer's rating. Previously, the minimum solvency margin or guarantee fund of an insurance organization was increased by the amount of ceded reinsurance premiums. A comparison of the reinsurance conditions is given in the table:

Clearly, the percentage burden on the minimum solvency margin has been reduced, but changing the base from the volume of reinsurance premiums to the volume of premium liabilities significantly increases the burden on the insurer's capital in the case of low-rated reinsurance.

In addition, serious changes affected the requirements for the maximum net retention (NR) per individual insurance risk depending on the actual solvency margin (ASM). For clarity, the changes are compared in the table.

In addition, extra requirements were introduced for reinsuring a risk with a non-resident reinsurer rated below “A-”. The cedent must:

- offer part of the risk for reinsurance to insurance companies that are residents of Kazakhstan;

- ensure that the reinsurance terms are identical to those offered to non-resident reinsurance organizations (ROs);

- offer the risk for reinsurance to at least 5 local insurance companies for general insurers and at least 3 for life insurers. The acceptance period is at least 3 business days.

- if a resident RO declines, send the offer to other Kazakhstan ROs until the total number of ROs reaches 10 for general insurers and 5 for life insurers

In my view, the regulator's legislative initiatives will lead to:

1. An increase in Kazakhstan content in reinsurance transactions
2. Increased capitalization of the local insurance market by reducing the outflow of funds abroad.
3. Greater transparency of reinsurance transactions.
4. A review of the underwriting/reinsurance policies of local insurance companies.

5. A higher concentration of risks in the local insurance market.

Finally, it should be noted that Kazakhstan insurers are quite capable of improving their balance sheet indicators and their ability to retain the risks they accept if they abandon rivalry and mutual distrust, which will allow them in the future to keep the highest-quality and most profitable parts of the insurance business available in Kazakhstan.

All of these measures, however they are adopted – individually or all together – can ensure the long-term development and profitability of the Kazakhstan insurance market.